Pelosi, McConnell Meet to Break Stimulus Stalemate

By Yuval Rosenberg

Congressional Leaders Meet to Break Stimulus Stalemate

The months-long stalemate over another coronavirus relief
package may finally be coming to an end.

Congressional leaders met for an hour Tuesday afternoon and said
they will be meeting again tonight to continue their talks on
Covid-19 relief and an omnibus year-end spending bill.

"We’re still talking to each other and I think there’s an
agreement that we’re not going to leave here without the [spending
bill] and the Covid package," McConnell said after the meeting,
according to
The Washington Post. "We’ll get an agreement as
soon as we can agree."

House Speaker Nancy Pelosi (D-CA) had invited McConnell, Senate
Minority Leader Chuck Schumer (D-NY) and House Minority Leader
Kevin McCarthy to meet today as they try to finalize a compromise
on the virus aid plan and a spending bill needed before funding for
the federal government runs out after Friday. Treasury Secretary
Steven Mnuchin reportedly joined by phone after speaking with
Pelosi for more than an hour earlier in the day.

The signs of progress come after a bipartisan group of lawmakers
led by Sens. Mitt Romney (R-UT) and Joe Manchin (D-WV) released a

$908 billion proposal split into two bills — one a
$748 billion package covering unemployment benefits, small business
aid and a host of other provisions with broad bipartisan support
and the other including $160 billion in state and local aid with
legal liability protections for businesses. The second bill pairs
the provisions that have proven to be most contentious throughout
months of talks.

McConnell on Tuesday again called on lawmakers to move forward
on the areas where they agree and set aside the aid for state and
local governments and the liability shield. "We all know the new
administration is going to be asking for yet another package,"
McConnell
said. "It’s not like we won’t have another
opportunity to debate the merits of liability reform and state and
local government in the very near future."

The bottom line: This is the first
time in months that congressional leaders have met in person to try
to work out a deal, but there’s still plenty of wrangling to be
done. The Post reports, for example, that "people close to
negotiations believe state and local aid appears likely to fall by
the wayside as lawmakers move closer to a final agreement." And
it’s not clear yet whether another round of stimulus checks might
still be added to the package, as some lawmakers have proposed. The
next 24 hours will determine a lot.

State and Local Tax Revenues Better Than Expected

Many economists worried that local tax revenues would fall
sharply in the wake of the coronavirus pandemic, creating a
long-lasting drag on the economy as payrolls shrank and public
investment declined, but state and local finances have held up
surprisingly well, according to a report out this week.

"In the early stages of the pandemic we warned that a plunge in
the tax receipts of state & local governments was likely to result
in major budget shortfalls, which could total between $300bn and
$400bn over the 2020 and 2021 fiscal years," Andrew Hunter of
Capital Economics said in a research note Monday. "With most
governments legally required to run balanced budgets, that raised
the risk of severe cuts to spending, which could weigh on the
recovery for years to come."

That dramatic fall in revenue hasn’t played out. Tax receipts
did fall sharply in the early days of the pandemic, but by less
than economic models predicted, Hunter said. Income tax revenues
were particularly resilient, reflecting the skewed nature of job
losses, which were – and still are – concentrated among low-income
workers, who pay less in taxes. Additionally, the massive fiscal
stimulus passed in the spring provided replacement incomes for
millions of workers, and the economic rebound in the third quarter
helped drive state and local tax revenues significantly higher —
higher, in fact, than they were a year ago.

"As a result, the revenues of state & local governments for
FY2020 (ending on 30th June) were only about $30bn smaller than
their pre-pandemic forecasts," Hunter wrote, adding that shortfalls
were expected to remain roughly at that level in the next fiscal
year as well.

Still, the drops in tax revenue are having a negative effect,
Hunter said, noting that state and local employment is down by 1.3
million since February. "[F]urther fiscal support for state & local
governments would still be worthwhile," Hunter wrote, even if the
scale of the problem has proven to be smaller than first
feared.

How the Size of the Stimulus Will Affect the Economy

The road to economic recovery will depend on the successful
rollout of coronavirus vaccines and the size and scope of any
additional relief package Congress provides.

"The entire policy response has been to bridge businesses and
individuals to the other side. The vaccine is the other side,"
Harvard Kennedy School economist Megan Greene
tells Politico’s Ben White. "If we can’t roll it
out effectively or we don’t continue to bridge even further until
it’s rolled out then it would be very difficult to avoid another
recession."

A new analysis by Standard & Poor’s Global Ratings illustrates
just what’s at stake in the congressional negotiations happening
now. The report finds that, based on an average projected boost
from stimulus measures, a $1 trillion aid package would see the
U.S. economy return to its pre-pandemic GDP by the third quarter of
next year.

"Not surprisingly," the report says, "an even bigger,
largely demand-driven stimulus package of $1.5 trillion in place by
the start of next year would provide even more juice to the
recovery, with the U.S. reaching pre-pandemic levels by
second-quarter 2021. Meanwhile, should Congress fail to produce a
package altogether, the U.S. economy would continue to suffer over
the short run, not reaching pre-pandemic levels until first-quarter
2022, almost a year later than in our $1.5 trillion
scenario."

Quote of the Day

"We need another injection to complete the job. Congress is
debating that right now, and I just hope very much that they extend
the PPP plan on a large scale to let people who may see light at
the end of the tunnel get to the end of the tunnel."

– Warren Buffett, chairman and CEO of
Berkshire Hathaway, urging Congress to extend the Paycheck
Protection Program during a
CNBC interview on Tuesday.

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